Boeing Co (NYSE:BA) stock has had a phenomenal 2017. The BA stock price has risen nearly 90% so far this year. Among stocks with a market cap over $60 billion, only Alibaba Group Holding Ltd (NYSE:BABA), which has doubled, has performed better.
The run has been a bit of a surprise. Heading into last November’s U.S. presidential election, for instance, BA stock hadn’t moved in three years. The Boeing dividend yielded over 3%. The BA stock price traded around 17-18x 2016 EPS estimates.
The market treated Boeing like a heavily cyclical, relatively low-growth stock, and, indeed, that’s what Boeing was. The company’s non-GAAP ‘Core’ EPS figure rose just 2.5% on average over the three years from 2013 to 2016. But 2017 has been a very different year, one reason why Boeing stock has taken off (pardon the overused pun).
Boeing started the year guiding for 27% adjusted EPS growth; guidance since has been raised to $10 at the midpoint, implying an impressive 38% increase year-over-year. In part due to that performance, the earnings multiple assigned BA stock has expanded to nearly 30x 2017 EPS.
There’s a case to stick with Boeing stock even after those gains. Technically, the BA rally looks perfect. Boeing has an enormous backlog in its passenger division, room for improvement in defense and a new strategy to grow its services segment. And the bear case here looks simple based solely on valuation, probably too simple.
Still, there’s reason to take at least some chips off the table when it comes to BA. Multiples are at an all-time high, Airbus Grp/ADR (OTCMKTS:EADSY) remains a tough competitor, and political developments haven’t gone the company’s way of late. Boeing has had an impressive 2017. But that performance also means 2018 has a very tough act to follow.
The easiest reason to stay with BA stock simply is momentum. “Don’t fight the tape,” as the old saw goes. The technicals for BA remain strong, as Joseph Hargett argued a few weeks back. And there was a case at $240 in August, and $260 just last month, that the run had been a little too far, too fast. Investors who sold out at those points missed more upside.
There’s a fundamental case as well. The relatively tepid earnings growth from 2013-2016 was driven by R&D investments, and Boeing now is reaping the rewards. Boeing closed Q3 with $474 billion in its backlog, and nearly 5,700 commercial airplanes under order.
Revenue growth should be solid going forward, enough to drive more margin expansion after a big jump this year. And the company expanded its share repurchase program to $18 billion and raised its dividend 20%, as Bret Kenwell pointed out a few weeks ago.
Boeing isn’t likely to post growth going forward at the level seen this year. But the move into the services business, which management on the Q3 conference call estimated to be a $2.6 trillion market, adds another potential driver long-term.
Operating margins in that business (guided to 15%+ this year) are higher than the company’s average as well. Longer-term, a growing global middle class, notably in China and India, should boost demand. And only Airbus seems a legitimate competitor to Boeing for at least the next decade.
The bull case for BA stock is summed up by the famous Warren Buffett aphorism: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Boeing seems a wonderful company at the moment. The only question, then, is whether the BA stock price truly is fair.
And it’s there that the case for Boeing stock gets a little thin. ~28x 2017 consensus EPS is a huge multiple, given that Boeing’s long-term growth likely remains in the high-single-digits or maybe low double-digits. The cyclical nature of the stock in theory should compress that multiple as well – which has been seen in Boeing’s historical multiples.
Meanwhile, there are some concerns here. Boeing has entered a trade war with Canada’s Bombardier Inc (OTCMKTS:BDRBF). As Will Ashworth detailed in October, that move upset customer Delta Air Lines, Inc. (NYSE:DAL), who this month responded by ordering 100 planes from Airbus.
Airbus then swooped in and partnered with Bombardier. Boeing is trying to make a deal with Embraer SA (ADR) (NYSE:ERJ), who also plays in the smaller jet space, but Brazilian government concerns seem likely to scuttle any merger.
That’s not the only competitive issue. It’s still a decade out, but China’s COMAC (Commercial Aircraft Corporation of China) is entering the widebody business.
None of these developments are likely to hit Boeing’s numbers in the near term. But they could change the sentiment around the stock and that is a concern. The broad issue with BA stock at the moment is that everything is going right. Andt this point, Boeing stock is priced as such.
There simply isn’t any room for error, or even modest concern, in the current valuation. With just enough potential for bad news in 2018, that seems to make Boeing stock somewhat dangerous at the moment.
As of this writing, Vince Martin has no positions in any securities mentioned.